Smart people, stupid choices: in Chief Executive's quarter century of existence, we've seen CEOs make big mistakes. A few learn from them - Chief Catastrophes - corporate management - Statistical Data Included

Chief Executive, The, August-Sept, 2002 by Catherine Fredman

Then there was the strategy that called for Webvan to enter 26 cities long before it had proved that its model worked. Commented one analyst, "No one has ever gone public with a national rollout with zero markets performing to plan." In short, Webvan's very creation was a bad decision, says Jeffrey Pfeffer, a professor of organizational behavior at Stanford Business School. "Either there is no viable economic model or if there is one, Safeway will do it better."

PRIDE. DEC gets decked by a changing market: Digital Equipment Corp. broke into the world of computers, then dominated by mainframes, in the l950s and grew to become the nation's second-largest computer company by the l980s with simply designed, inexpensive minicomputers. Yet in an ironic twist of fate, DEC top dog Kenneth Olsen pooh-poohed PCs, dubbing them "cheap, short-lived and not-very-accurate machines." On top of the world in 1987 with a market capitalization of $26 billion, by May 1992 the company had lost more than three-quarters of its value and was saving money by switching to a cheaper supplier of toilet paper. Two months later, Olsen, the longest-reigning founder of a major computer company and the person The Wall Street Journal hailed as "the most successful U.S. entrepreneur since Henry Ford," resigned. DEC itself was eventually sold to Compaq, a maker of those very "toys" Olsen had derided.

MORE PRIDE. Oxford Health Plans' diagnosis for technology disaster: "I'm an entrepreneur first, a professional manager second," boasted Chairman Stephen Wiggins in happier times at the health-maintenance organization he founded in 1984. As if that admission weren't alarming enough, being a good picker of computer systems was even lower on his priority list. As revenue and earnings growth skyrocketed eightfold between 1992 and 1997, Oxford invested in a $100 million, customized computer system. Instead of a safety net, it was a ticking time bomb. "We knew trouble was coming," said one former programmer. "The way they were doing it was just textbook wrong"--including ditching the backup billing system.

The bomb exploded on the first day of operations in September 1996. The company failed to generate premium invoices for many customers for four months. Claims processing proved an even bigger debacle, with so many reimbursements languishing unpaid for six months or longer that physicians dubbed the company "Oxfraud." Wiggins stonewalled but couldn't defend himself against a stock price that dropped nearly 43 points in one day. Within four months of that "Ugly Monday," Wiggins was forced to resign as part of the company's bailout deal with investment house Texas Pacific Group.

WRATH. Frank Lorenzo grounds Eastern Airlines: It's not often that a CEO is publicly castigated by Congress, but so bitter, prolonged and, ultimately, unnecessary was Frank Lorenzo's quarrel with Eastern Airlines' labor unions that on October 26, 1989, the Congressional Record noted: "Frank Lorenzo has sabotaged a distinguished airline and disrupted the lives of its employees." Lorenzo had already displayed his cost-cutting strategy at Continental Airlines: By filing for bankruptcy, he was able to fire union employees and restart the airline with a non-union staff forced to accept lower wages and longer hours. When he acquired the debt-ridden Eastern in 1986, he expected to employ similar tactics to turn around the troubled airline. He asked machinists to accept a pay cut, but the union balked and went on strike. Pilots and flight attendants followed suit, and the company-wide strike put Eastern further in the hole. Its creditors took Eastern to court, where federal bankruptcy Judge Burton Lifland eventually declared Lorenzo "not competent" to run the airline. "Frank was like Captain Ahab," recalled Carl Icahn, Lorenzo's counterpart at TWA. "He was obsessed with beating the unions." Eastern went out of business in 1991.